Day trading refers to the purchase and sale of securities in a single day. It requires a complex web of skill and knowledge. But it is not just about the thrill and skill for day traders. What really matters is how much money they can expect to make by day trading in the stock market.
The earnings from day trading typically depend on a host of external factors including trading strategies, risk management, and capital. So, it is not possible to provide an exact figure offhand. But there are always some indicators to help you figure out your earnings from day trading.
The most important thing is knowing how to invest in the stock market. You can then strengthen your trading strategy and find ways to manage risks better. Day traders don’t necessarily stick to one approach. The market trends keep changing, forcing day traders to refine their share market strategies constantly.
Trading efficiently is the key to earning big from the share market. Here are a few things you should know to master day trading and start booking profits:
- Risk management
The most effective way to manage risk is by taking small risks on each trade. Professional day traders generally risk around 1% of their trading capital. For instance, if you have a trading capital of Rs 50,000, you would risk a maximum of Rs 500 per trade.
- Trading strategy: Win rate and loss
The win rate indicates how many times you win a trade. Suppose, your trading strategy wins 60 out of 100 trades. This means you have a win rate of 60%.
It is desirable to maintain a consistently high win rate. However, it does not help if your winnings are smaller than your losses on the losing trades. So, make sure to assess the quality of your wins and losses.
- Trading strategy: Reward-to-risk ratio
While aiming for a win rate of 50% or more, you should consider the reward–risk ratio. Most day traders seek to win bigger to overcome their losses. This usually amounts to 1.5 times or more the amount risked. For instance, if a trader risks Rs 500 on a trade, the aim is to make at least Rs 650 on the profitable trades.
How much you can earn from day trading: An example
Here is a trading strategy where the stop loss is Rs 3.00 and the target is Rs 4.00 with a risk cap of Rs 500 (1% of Rs 500). By going with the stop loss, you can buy 250 shares with each trade.
In that scenario, your profit would look like this:
- Let’s assume that 55 trades were profitable: 55 * Rs 4.00 * 250 = Rs 55,000
- Now, imagine that the remaining 45 were sold at a loss: 45 * Rs 3.00 * 250 = Rs 33,750
- You profit would be Rs 55,000 ‑ Rs 33,750 = Rs 21,250 (without including the cost of commission)
Remember, the profit shown in theory may be reduced for a number of reasons.
Day trading is not everyone’s cup of tea. It takes a lot of practice, discipline, and patience to become a successful trader. The more time you invest in doing research, the more skilful a player you would be. To achieve a consistent income in the share market, you will need to have a solid trading strategy. The key is to keep your profits higher than your losses.